Analysis: Housing experts warn of hiccups as new U.S. mortgage rules go live

Thu Jan 9, 2014 10:48am EST
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By Emily Stephenson and Margaret Chadbourn

WASHINGTON (Reuters) - U.S. banks and housing groups are bracing for paperwork headaches and delays as major post-crisis mortgage reforms take effect later this week, but experts say prior warnings of a blow to the housing recovery will not be proven right.

On Friday, lenders must be prepared to verify that borrowers can repay their home loans, under rules written by the Consumer Financial Protection Bureau and required by the 2010 Dodd-Frank Wall Street oversight law.

Banks will have to consider a list of factors that show the consumer's financial health, including income, existing debt obligations and credit history.

The reform seeks to prevent a repeat of the 2007-2009 financial crisis, when millions of people's homes went into foreclosure, in many cases because the borrowers received loans they could not afford.

When it was first introduced, the change spooked both banks and housing advocates, who said a strict interpretation would force lenders to extend loans only to borrowers with spotless credit, potentially derailing the fragile housing recovery.

Along the way regulators softened the rule, easing those fears.

Still, banks have scrambled over the last year to update technology, write new lending procedures and train employees to comply with the requirements. Experts warn consumers could see some disruptions over the next few weeks, including longer mortgage application processing times and paperwork problems.

"We do think there could be some short-term wrinkles in the January-February time frame as the cutover occurs and lenders have to port over to new systems," said Stan Humphries, chief economist at Zillow (Z.O: Quote), an online real estate database.   Continued...

A view of single family homes for sale in San Marcos, California October 25, 2013. Mike Blake